The African Continental Free Trade Area agreement (AfCFTA), launched on March 21, 2018, creates the largest free trade area in the world and is designed to create a single market for goods and services across the continent. AfCFTA aims to boost intra-African trade by 52% by 2020,1 and the removal of non-tariff barriers will make it more attractive to invest in African economies. This article will look at how AfCFTA affects intra-African energy investments and projects.
While the developed nations of the world enjoy secure, uninterrupted power supplies using significant levels of renewable energy, many African countries experience acute power shortages related to high demand and underutilization of renewable resources.2
This is because most African countries have a weak and unstable electrical network system, i.e. a grid whose power generation cannot meet demand, leading to network component overload and continual or persistent power outages or even severe network damage. Weak and unstable grids are characterized by the following:
- complete loss of power (power blackouts);
- partial loss of power (power brownouts) where the voltage level is below the minimum level specified for the system; and
- rolling blackouts: intentionally engineered electrical power outages caused by insufficient available sources to meet prevailing demand for electricity.3
In many African countries, including Zambia, South Africa, Cameroon, Nigeria and the Democratic Republic of Congo, rolling blackouts have become a daily occurrence, resulting from the inadequate electrical supply and ever-expanding demand, coupled with an aging electricity supply infrastructure, non-diversification of energy sources, and overloading of the existing electricity system.4
The importance of constant regular electricity supply cannot be overstated. The UN’s Sustainable Development Goals5 state that energy is a vital, integrated element of infrastructure that is critical for reducing poverty and achieving many of the other 16 Sustainable Development Goals.
With up to 90% of national electricity generation across Africa coming from hydropower6 it is clear that current electricity generation methods will not fulfill this goal. This challenge is compounded by climate change, with analysts projecting a warming trend, particularly in the inland subtropics characterized by frequent and extreme heat waves, increasing aridity and changes in rainfall, with a particularly pronounced decline in southern Africa.7
This serious shortage of electricity in most African countries creates a need for the introduction of power generation from alternative sources. The challenge of electricity supply is being tackled head on and several high-value projects are underway across the continent. Examples include:
- the Noor Solar Complex in Morocco;8
- the rehabilitation of the Cahora Bassa hydropower plant in Mozambique;
- a EUR620 million wind farm with 365 turbines in northern Kenya;9 and
- the Batoka Gorge Hydroelectric power project between Zambia and Zimbabwe.10
All these energy projects have an intra-African connection. For instance, the Cahora Bassa plant exports a significant amount of its production to South Africa, Botswana and Zambia. The African Development Bank served as lead arranger for EUR436 million in senior credit facilities towards the Kenyan wind farm’s cost of EUR623 million. The Batoka Gorge Hydroelectric power station is expected to generate 2,400 MW of electricity to be shared equally between Zambia and Zimbabwe.
Intra-African investment in the age of AfCFTA
AfCFTA guarantees potential investors access to information, as parties to the agreement must publish their laws, regulations, procedures and administrative rulings of general application as well as any other commitments under an international agreement relating to any trade matter covered by the agreement. It is hoped that publishing this information will make the interstate market conditions more transparent and appealing.
Part II of the Protocol on Trade in Goods under the AfCFTA provides for Non-Discrimination, which is divided into three parts: the Most Favored Nation (MFN) Treatment, the National Treatment (NT) and the Special and Differential Treatment. The MFN Treatment requires a country to provide any concessions, privileges, or immunities granted in a trade agreement to one nation to all other member countries, for example if a nation reduces tariffs by 10% for one nation, the MFN clause states that all members will have tariffs cut by 10% into that nation.11
The NT focuses on treating foreigners and locals equally. Imported and locally produced goods should be treated equally, at least after the foreign goods have entered the market. This should apply to foreign and domestic services, trademarks, copyrights and patents.
In conforming with the objective of the AfCFTA to ensure comprehensive and mutually beneficial trade in goods, state parties must provide flexibilities to other state parties at different levels of economic development or that have individual specificities as recognized by other state parties.
Part III of the Protocol on Goods provides for liberalization of trade, which looks at aspects such as import duties, general elimination of quantitative restrictions, export duties, elimination of non-tariff barriers and rules of origin; all of which are aimed at making it easier and cheaper to trade goods and services, including energy, within Africa.
Under the AfCFTA, expanded markets and free movement of labor, goods, services, capital and people should promote economic diversification, structural transformation, technological development and quality job creation. The full implementation of the AfCFTA will eliminate all tariffs and will be a game-changer for energy producers across the continent, creating a knock-on impact in multiple sectors of the economy.
The AfCFTA has been signed by 54 out of 55 AU Member States, with only Eritrea yet to join. Gabon and Equatorial Guinea12 recently deposited their instruments of ratification, bringing the number of countries that have ratified the agreement to 27.
There is an undisputed link between global economic growth and energy demand. To grow and prosper, African nations will need more reliable and affordable energy. Free trade and strong investment protections support energy security by encouraging access to diverse energy supplies and production sufficient to meet growing demand. Trade policies and protections also enable effective supply chains and the efficient movement of capital, people, information and all products.
Free Trade Agreements are one of the best ways to open up markets by enhancing rules of trade law, reducing tariff and non-tariff barriers and by creating a more stable and transparent trading and investment environment. The free flow of commerce is essential to maximizing global economic growth and prosperity, and even has implications for national security. By enabling energy supplies to flow more smoothly between nations, the AfCFTA will, in theory at least, make it possible for suppliers to meet the energy need efficiently and affordably.
But there are several obstacles to the AfCFTA’s success. Key among them is the fact that critical parts of the agreement have yet to be finalized before countries commence trading under the AfCFTA on July 1, 2020.
These outstanding sections include details on schedules of tariff concessions and services commitments, and policies around investment, intellectual property and competition. Until these sections are concluded and the AfCFTA is truly fully operational, investors may likely find that they have to trade on pre-AfCFTA terms.
Investment promotion and protection strengthen successful regional integration arrangements. However, unlike the common practice of protecting foreign investments by building investment protective rights into investment treaties and agreements, the AfCFTA does not guarantee individual investors any rights as regards their investments. This means that while it will be easier to get into a country to trade, an investor must look to multilateral or bilateral agreements that coexist with the AfCFTA, such as the Investment Agreement for COMESA Common Investment Area and the ECOWAS Supplementary Act on Investments, for investment protection.
AfCFTA opens Africa up to African investors. Its potential to change Africa by making energy cheaper is remarkable but its promise of continental success comes with the risk of investing without inbuilt investor protections. While trade in the AfCFTA age will be easy and bring benefits aplenty for both investors and consumers, investors will still have to look outside of AfCFTA for protection against unlawful state action.
1 The Quest for Africa’s Trade Growth: Intra-African Trade and the Proposed African Continental Free Trade Areas (AfCFTA): A Commodification Of Old Practice or Maintenance of New Order?
2 Journal of Renewable and Sustainable Energy 2, 023102 (2010); doi: 10.1063/1.3289733
3 Understanding Adaptation to Climate Change in Developing Countries 2005, International Institute for Sustainable Development.
4 Journal of Renewable and Sustainable Energy 2, 023102 (2010); doi: 10.1063/1.3289733
5 Sustainable Development Goals, United Nations Development Programme
6 Hydropower in Africa: Plans for new dams could increase the risk of disruption to electricity supply, LSE
7 Climate change impacts in Sub-Saharan Africa: from physical changes to their social repercussions, Regional Environmental Change, January 2016
8 Solar plant the size of San Francisco powers Morocco’s sunlit ambitions, Climate Home News
9 African Development Bank Group
10 Batoka Gorge Hydroelectric power project in Zambia to begin this year, Construction Review Online
11 United Nations Conference on Trade and Development. African Continental Free Trade Area: Policy and Negotiations Options for Trade in Goods.
12 Africa to Commence Trading Under Free Trade Pact in July 2020, AllAfrica
DLA Piper Africa is a Swiss verein whose members are comprised of independent law firms in Africa working with DLA Piper.